contracts, negotiation and scrutiny skills negotiation and scrutiny skills r.muralidharan, ......

CONTRACTS, NEGOTIATION AND SCRUTINY SKILLS

R.Muralidharan, Advocate, Law Lecturer, Patent & Trademark R.Muralidharan, Advocate, Law Lecturer, Patent & Trademark Attorney

[email protected] cell 0 [email protected]

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Presentation Summary• Introduction to contracts• Types, parties and Preliminaries• Offer, acceptance, consideration and purpose.• Terms and Conditions & Permissible

modifications from standard legal termsmodifications from standard legal terms• Check List for the essential terms or standard

clauses in the contract..• IPR, confidentiality and dispute settlement issues

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Preliminaries

• The starting point of a contract is offer. When an offer is accepted and supported by consideration then it becomes an agreement.

• If an agreement is enforceable at law, then it • If an agreement is enforceable at law, then it becomes a contract.

• For an agreement to become enforceable at law, the following conditions must be satisfied.

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Preliminaries.. continued

• Parties are competent to contract. • Their consent is not vitiated by fraud,

misrepresentation, undue influence and/or coercion. coercion.

• The agreement is not opposed to public policy or will violate law(if it violates law it becomes criminal conspiracy punishable with imprisonment)

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Preliminaries ..con’td

• Parties intended to enter into legally enforceable obligations.

• A written document is not essential for enforcing a contract. Very often contracts of low value are not even documented even though discharged not even documented even though discharged routinely.

• Some types special contracts will involve Compulsory Registrations & Special Regulatory Compliance issues. In such cases, written agreement is mandatory.

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Preliminaries.. Con’td• However, in today’s globalised world, the net

worth of a big listed company is also measured by the value of contracts they have in hand. Hence it is imperative that as and when contracts of documented, it is necessary to exercise utmost care and diligence. care and diligence.

• During times of Private placement of Capital, Mergers, Acquisition, and other take over's, high value contracts will be subjected to legal due diligence as well.

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Check list:-

• Identify the objectives.• Time frame and milestones.• Compliance of Statutory and Regulatory

formalities. formalities. • Business reasons for entering into a contract.• Legal Environment.• Dispute settlement ,indemnity and IPR issues.• Standard Form contracts: Abuse of dominant

marketing position-Unfair contract terms

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Check list:- Cont’d• After having a reasonable idea on the above

points, check if the following standard contractual provisions have been incorporated in the contract.

• If not, Why not?• If yes, what modifications ought to be made to • If yes, what modifications ought to be made to

accomplish your business reasons and further examine whether some of these standard provisions should be removed at all and the extent of freedom of contract to modify the terms.

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Check list:- Cont’d

• Make sure that each of the point are covered by a single para comprising preferably one sentence not exceeding four or five lines. Remember that normal human mind with Remember that normal human mind with above average intelligence will find it difficult to understand a sentence that has more than 40 words.

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Check list:- Cont’d

Remember a good draft, if easily comprehensible will receive immediate acceptance.

If the contract is going to employ many industry specific technical terms, and if these terms mean specific technical terms, and if these terms mean different things to different sectors of the same industry, make sure that these terms are defined in the contract itself. With these general inputs, proceed to examine each of the different parts of the contract.

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Check list:- Cont’d• Typically, a well drafted commercial contract

has the following clauses with varying forms of additions, modifications, hybridizations of the following issues.

• They are as under:-• They are as under:-• Title/nomenclature• Parties (natural and artificial persons)• Preamble, reasons as to why parties are

contemplating to enter into the contract.

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• Who makes the offer, what are the terms of offer ?

• Does the offer specify any special mode of communicating the acceptance?communicating the acceptance?

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Consideration

• Stipulation regarding payment.• Consequences of delayed payment• Milestones; scrutiny of the compliance of

milestone.milestone.• Time being the essence of the contract for

payment and performance of obligations • Condition, warranties, guarantee issues (financial

and performance)• Implied Conditions and Warranties.

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Conditions and Warrenties

• Effect of expressed terms in deviation with normal standard terms.

• Possibility of intermediate examination and the concept of patent and latent defects.Effect of acquisance to delayed performance of • Effect of acquisance to delayed performance of obligations.

• Check if the contract involves the use of trademark, copyrights, patents, designs, trade secrets, confidential information that the client provides on oath of secrecy.

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IPR issues

• Carefully examine if the contract will involve the use of

• A) The IP for which, the client claims that he is the owner.

• B) That the IP that you will use in pursuant of a license agreement that you have with the third license agreement that you have with the third party vendor

• C) The IP that, you may generate during the subsistence of the agreement.

• D)If involves transfer of your IPR to your client, under what mode?

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IPR issues –cont’d

• If the client provides the platform technology or IP and expects you to evolve better applications from the same platform, conduct appropriate patent search to verify if the client’s statement is true. true.

• Existence of patents, designs and trademarks can be verified with statutory authorities. Copyrights do not require registration. Trade secrets by their nature are neither disclosed nor registered with statutory authorities.

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IPR issues –cont’d

• In the event of the client’s statement being untrue, regarding the ownership of the IPR, the company may be sued for an IPR infringement case on the ground of secondary infringement.case on the ground of secondary infringement.

• Remember facilitating some one to commit an infringement is secondary infringement.

• We cannot plead ignorance of the existence of IPR as the same can be found out by a due diligence search.

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Patent issues –cont’d

• In some areas such as telecommunication, information technology, pharmaceuticals and chemicals, there is aggressive patenting. Unwittingly, we may find that granted but Unwittingly, we may find that granted but invalid patents claiming much bigger monopoly than what they are legitimately entitled for. In such a case, when in doubt obtain from competent IPR lawyer, freedom to operate opinion.

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• Among all IPR, patent really provide effective commercial monopoly as it protects all commercial expressions of a good idea.

• As and when you think you land up on an • As and when you think you land up on an important invention examine if it would qualify for patent by applying NUNS test.

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Patent issues –cont’d• If the project involves high value, creation of new

technologies make sure there is no unwitting or innocent infringement of third party’s patent.

• Patent litigations are costly and patent compensation awards can be crippling.

• Patents are strictly territorial and hence check for • Patents are strictly territorial and hence check for the areas where the patents are current and valid.

• In other places you are free to use it so long as the goods or services are not brought into the place were the patent is subsisting.

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Patent issues –cont’d• Many countries require registration of patent

licensing agreement and the said registration process would involve additional costs depending on the consideration shown. Hence it is advisable to have patent licensing agreement accompanied by a separate know how transfer if the situation can justify it.

• Remember, that the consideration that you may • Remember, that the consideration that you may show in the patent licensing agreement will become a bench mark for computing compensation for infringement or determination of royalties in case of compulsory licensing.

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Patent issues –cont’d• If the contract is transfer of patented technology

and protected know how, involving use, modification or making improvements over the transferred technology, the ownership of the improvements to the technology should be agreed upon.upon.

• The following are the possible options.• 1) By a contract the transferor retains the rights

to all the improvement IPR accruing from the modification of the transferred technology.

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• 2) the transferee is put under a strict obligation to disclose to the transferor all the improvements made in the transferred technology and the transferor at his option allows either joint patenting or patenting in the name of the patenting or patenting in the name of the transferee.

• 3) If the improvement IPR is reserved solely in favor of one party, the other party should seek at least a non-exclusive perpetual royalty free license, which should preferably be transferable.

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• 4) In the event of joint ownership how the cost of patenting will be apportioned or territories earmarked for the parties.

• 5) If it is an area where the company is • 5) If it is an area where the company is operating regularly, the improvement IPR will be invariably use by the other members of the same company in future project. Hence please reserve the right to use the improvement IPR for future commercial use.

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• 6) it is customary for the patent holder to incorporate in patent licensing agreements a clause, whereby the licensee is prohibited from challenging the legal validity of the IPR of from challenging the legal validity of the IPR of the transferor. Prima facie such clauses are anti competitive. Employment of these clauses may even amount to inequitable conduct on the part of the IPR holder making the IPR unenforceable.

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Patent issues –cont’d• However, other restrictive business practices such

as tie in territorial restriction, qualitative restriction, quantitative restriction can be incorporated provided the same can be inferred as “reasonable” in the circumstances.

• Remember, competition law issues can results in costly fine and penalty. If restrictive trade costly fine and penalty. If restrictive trade practices are employed in contract make sure they are reasonable, absolutely necessary in the circumstances and will have no adverse effect on the general competitive environment prevailing in the market.

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Copyright issues• Usually, software is also protected as a literary

work under the copyrights Act. Copyright is a relatively a weaker form of IPR as it does not protect the idea but only the manner of expression of the idea.

• Though copyrights need not be registered, licenses and assignments must be in writing.licenses and assignments must be in writing.

• Every improvement to a protected work results in a new version and the same can be protected by an independent copyright.

• Interface between protected proprietary software and open source software.

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Trade secrets

• Examine whether the contract involves transfer of trade secrets and information given on condition of confidentiality. If there is a confidentiality agreement, even an information which is on public domain (that is which can be found out by public domain (that is which can be found out by a simple Google search), if the transfer of information is preceded by confidentiality obligation, it becomes protected by contract, notwithstanding the fact the same can be found by a due diligence search.

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Trade secrets..cont’d

• If the contract involves transfer of trade secrets and confidential obligation, appropriate safe guards to maintain confidentiality and preserve the trade secrets confidentiality and preserve the trade secrets must be indicated. It is better to identify the secrets rather than trying to define it. Remember if you define it, secrecy may be lost. Use annexures for identifying and describing the nature of trade secrets.

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Trade secrets…cont’d

• Very often it is difficult to come to a conclusion whether a so called trade secret deserve legal protection or not. Information technology Act recognizes that trade secrets are legally protected . Unlike other forms of are legally protected . Unlike other forms of IPR, where there are many legislations and abundant case laws, the area of trade secrets is relatively virgin and hence even very competent lawyers are likely to make mistakes.

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• One has to rely on judicial decisions to decide whether the so called trade secrets deserves legal protection. The following factors may be helpful for determining whether commercially valuable information can qualify for legal valuable information can qualify for legal protection as trade secrets.

• 1) The extent to which the commercially valuable information is known in the industry.

• 2) The amount of money, time, efforts spent by the holder to acquire the said commercially valuable information. 31

Trade secrets…cont’d• 3) The measures taken by the holder to

protect the secretive nature of such commercially valuable information.

• 4) The percentage of employees who come to know these trade secrets in the normal course of their employment.of their employment.

• 5) The steps taken by the employer to protect the secrecy by imposing confidentiality and non compete agreements with any one who comes to know of these commercially valuable information such as employees, sub contractors, etc., 32

Trade secrets…cont’d• 6) The speed or ease with which a person can

acquire the so called commercially valuable information.

• 7) The amount of money or other consideration that the competitors will be willing to part with for acquiring such willing to part with for acquiring such information.

• 8) The concept of trade secrets in the absence of codified statutory law becomes very elastic and hard to make an intelligent guess. The content of trade secrets protection varies from society to society and country to country. 33


• 9) If the contract involves the rights of the individuals, especially former employees accepting the obligation of non compete and confidentiality, care must be taken to ensure confidentiality, care must be taken to ensure that such obligations are fair, reasonable and justified in the circumstances to protect trade secrets.

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• 9) If the contract involves the rights of the individuals, especially former employees accepting the obligation of non compete and confidentiality, care must be taken to ensure confidentiality, care must be taken to ensure that such obligations are fair, reasonable and justified in the circumstances to protect trade secrets.

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Non-compete agreements and confidentiality:

• Prima facie, all non compete and confidentiality agreements may fall under the mischief of section 27 of the Indian Contract Act’s stipulation that all agreements in restraint of trade are void. Hence, in such cases, the burden of proof will shift on the cases, the burden of proof will shift on the employer or a person with the relative dominant position to show that such non-compete agreement and confidentiality obligations are reasonably necessary to protect the commercially valuable and legally protected information. 36

Non-compete and confidentiality cont’d

• To establish reasonableness of such obligation, the operation of the said non-compete and confidentiality obligation will be subjected to the following limitations. the following limitations.

• A) Restricting the operation of the obligations to a specified period or occurrence of a contingency. (eg:-three years period or the confidentiality obligation coming to end when the information is enlarged into public domain due to act of third parties) 37

Non-compete and confidentiality cont’d

• b) Restricting operation of the non-competition agreement only to specified competitor companies.

• c) restricting the operation of these • c) restricting the operation of these obligations to a specific area in an industry.

• d) Restricting the scope of the obligation to a specified regions or identified territories.

• e) Providing a special consideration in addition to the normal retirement wage to ensure specific consideration for observance of these obligations.

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Non-poaching• When the contract involves deputation of

once human resources to the client’s premises and the client’s staff visiting your facilities, in order to avoid misunderstanding arising from the employees crossing over to the other side, the employees crossing over to the other side, it is better to incorporate non-poaching obligations whereby both the parties undertake not to recruit the employees of the other for a minimum period of two to three years after the termination of the contract of employment with the other party.

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Indemnity issues:-

Indemnity is a transaction wherein one of the parties to the contract promises to the other that in the event of the other party being put to inconvenience or financial loss because of to inconvenience or financial loss because of performance of agreed obligation, the first party promises to make good not only the direct losses but also incidental losses such as the cost of enforcing the indemnity.

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Indemnity issues:- cont’d

• In transactions where you believe that the ownership of IP may be a matter of dispute, incorporation of indemnity clauses is very important. If an indemnity is taken make sure important. If an indemnity is taken make sure that a credit check is done about the person providing the indemnity, depending on the value of the contract and possible claims arising from future IP infringement.

• In such cases one has to exercise business wisdom of whether indemnity in such situation will be effective at all.

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Indemnity issues:- cont’d

• Care must be taken to ensure that the negotiation of indemnity clause does not become a deal breaker. Nevertheless, if consideration is paid for purchase of consideration is paid for purchase of technology, make sure that the seller has title to the technology. No person can convey under law a better title than what he himself has.

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Applicable law and dispute settlement:-

• In order to avoid the uncertainties of the unpredictable judicial process, it is customary to incorporate, arbitration agreements and provide in the contract the choice of law provision whereby the parties agree on the provision whereby the parties agree on the applicable laws.

• The applicable legal system can be that of any of the parties to the agreement and or the legal system having a real and effective connection with the chosen system.

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Applicable law and dispute settlement:-cont’d

• Please remember that applicable law can be different from venue of arbitration. Though all contracts provide for arbitration in either Europe or United States of America often Europe or United States of America often considering the value of the contract, the cost of arbitration can be prohibitively expensive. Hence it is advisable to have the arbitration either in Singapore or Sri Lanka which are known to provide favorable inexpensive arbitration solution for resolution of business disputes.

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Applicable law and dispute settlement:-cont’d

• If the contracts involve the adjudicating the validity of intellectual property rights , (normally rights in rem are adjudicable only before courts of law), It would be advisable to before courts of law), It would be advisable to provide the arbitrator power to pronounce of the validity of IPR which of course would bind only the parties to the dispute. Otherwise in some jurisdiction, the arbitrators would refuse to consider the issue of validity particularly when the license prevents any challenges to the validity of the IPR.

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Applicable law and dispute settlement:-cont’d• If one of the parties is from a non-English

speaking area, it is better to specify the language of arbitration as well.

• Alternatively, if there is an individual or an organization in which, both the parties repose organization in which, both the parties repose confidence, it would be better to identify the person or the organization as the arbitrator to adjudicate the dispute.

• Discharge of contract by efflux of time. Usually, contracts provide a time span during which the contract will govern the relationship of the parties.

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Discharge of contracts:-

• If that period had expired, the contract is deem to be discharged by efflux of time. In many situations parties may continue the contract even beyond the stipulated time with contract even beyond the stipulated time with an understanding that the contract will continue subject to certain modifications which they have mutually agreed in the light of the experience acquired while discharging the contract.

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Discharge of contracts:-cont’d

• Under law, the contract is deemed to be discharged in the following circumstances.

• 1) performance• 2) when the contract is for a prescribed • 2) when the contract is for a prescribed

period, on the expiry of the said period.• 3) when the contract is frustrated or becomes

impossible to perform. • 4) by breach of contract.

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Discharge of contracts:-cont’d

• In situations where the contract is for a specified period, it is better to specify whether the contract will continue unless specifically the contract will continue unless specifically repudiated by either of the parties.

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Modifications

• In the course of execution of the contract, the parties may find some of the terms impracticable and hence may decide mutually to modify the original terms. It is advisable to to modify the original terms. It is advisable to specifically lay down a procedure for modifying the existing terms.

• The person competent to modify the existing terms of a contract shall identify by name or designation.

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Modifications contd….

• In case of a modification, an effective date, which can be earlier or later to the date of modification shall be specified.

• Sometimes, modifications maybe • Sometimes, modifications maybe involuntarily.

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SEVERABILTY

• Sometimes due to changes in the law, a part of the performance contemplated in the contract becomes illegal or the subject matter of the contract becomes extinct.of the contract becomes extinct.

• In such situation, instead of making the entire contract unenforceable, it is better to incorporate a severability clause in a contract.

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Severability contd…

• In situations where severability is not possible, the entire contract gets frustrated and becomes impossible of performance only after saving the vested or validly acquired legal saving the vested or validly acquired legal rights of the respective parties

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FAIR CONTACT OR STRONG CONTRACT ?

• Though Emotions may lead one to choose strong contract, the reasons and rational intelligence should compel one to choose a fair contact.fair contact.

• It is customary for the parties to prescribe either tough and penal consequences for non performance of a contractual obligation, or totally exonerating one of the parties from any kind of responsibility or liability. 54

Fair or strong contract contd…

• If one of the parties is a big commercial organization, a reasonable mind (a judge or jury) will view such a clause as abuse of dominant possession by one party.

• Therefore, what was intended to be an additional safeguard becomes a milestone around the neck.

• This results in employee unfair contract terms.55

COMPETITION LAW ISSUES

• Employment of unfair restrictive business practices in a contact makes the contract suspect from the point of view of Competition Laws.Laws.

• In United States, the enforcement of Competition Law with due seriousness depends on who is in power (Republican or Democrat)

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Competition Laws contd…

• Europe has a history of stringent monitoringof big business entities that have good marketshare.

• If the unfair contract term employed in thecontract results in an ‘appreciably adverseeffect’ on Competition climate, thenCompetition Commission fines them heavilythat can make a serious dent on the balancesheet. 57

Competition Laws contd…

• Illustrations:-

a) Microsoft Internet Explorer abuseb) Microsoft fines paid to European Competition b) Microsoft fines paid to European Competition

Commissioner.c) Microsoft fines paid to Korean Competition

Commissioner.

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FORCE MAJURE

• Force Majure is the contractual provision of allocating the risk if performance becomes impossible or impracticable.

• This clause shall apply when an event takes place which could not be anticipated or controlled by the parties.

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Force Majure contd…• The term ‘Force Majure' is a French word

meaning superior.The term includes arts of nature (e.g. floodsand hurricane), act of people (e.g. riots,strikes, wars)strikes, wars)

• If this clause is not incorporated in thecontract, it will be left at the discretion of theCourt or Arbitrator to decide whether thisprovision should be applied to the contract ornot.

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TAXATION ISSUES

• The taxation laws stipulate on whom the tax obligation shall rest.

• Though the parties may by contract choose • Though the parties may by contract choose some other system as applicable law, if income or fee is accrued or received within a State, the State will tax the recipient.

• There are double taxation avoidance treaties. 61

Taxation Issues contd…

• In case of one party being foreign,a) their domicileb) the place of performance of obligationc) the place from which performance will be c) the place from which performance will be

made d) place where the payments are to be made

must be carefully considered to determine tax incidents.

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SIGNATURE,WITNESSES ETC

• In most of the corporate contracts, executionis preceded by elaborate documentation suchas emails, faxes exchanged, writtencommunications between the parties, minutescommunications between the parties, minutesof the meeting, part performance of thefuture obligations etc.

• Witnesses are therefore not necessary forcorporate contracts.

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Signature, Witnesses etc contd….

• However it must be made sure that theperson who signs the contract should have theauthority to represent the Company.

(e.g. Company Secretary, Executive Director )(e.g. Company Secretary, Executive Director )

• Other persons have the authority torepresent the Company only when they areauthorised by a Resolution of the Board ofDirectors.

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WITNESSES

• If there two witnesses, the first witness is called an identifying witness and the second one is called attesting witness.

• The identifying witness identifies the signatures to the transaction.

• The attesting witness simply vouches that the signatures were made in his presence.

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Witnesses contd…

• Both the witnesses need not know the contents of the document.

• Witnesses play an important role when any • Witnesses play an important role when any dispute relating to interpretation arises between the parties.

• More than the witnesses, the Courts give effect to the letter and the spirit as expressed by the letters. 66

Thank you for a patienthearing

Acknowledgements: Ms.K.N SALJA, Advocate & Registered Patent Agent. ANDMs.ISHIKA SIRCAR, Final Year LLB Student, (2008) Bishop

Cotton Law College, Bangalore.

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contracts, negotiation and scrutiny skills negotiation and scrutiny skills r.muralidharan, ......

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